Niche or Mass Market?: The Regional Context of Tourism in Palau

���� � Palau is currently at a crossroads. No longer able to rely on the aid and assistance from Washington that had come to play a central role in its economy, Palau, which gained independence in October 1994, is faced with the daunting task of building a self-sustaining national economy in a turbulent and rapidly globalizing world. This tiny Pacific Island country has few natural resources to exploit and is unlikely to duplicate the manufacturing-based, export-led growth strategy of the so-called East Asian model. As in other small island nations, international tourism is currently being touted as the viable industry for the country, and this in turn has precipitated debate over the merits of tourism-based development. International tourism development is often discussed as if it were akin to selling a commodity in a centralized global exchange—offer the “product” on the “market” and customers will “buy” according to the principles of supply and demand. While such a characterization might be valid at a highly aggregated, abstract level over the long run, the practical reality of national tourism development is one in which, to use the language of neoclassical economics, a variety of “externalities” “distort” the market and structure the opportunities available to countries in very significant ways. This is fundamentally true of small island nations like Palau that depend on air transport as the primary medium for conveying inbound tourists. Under the current international air transport regime, outcomes are as much a product of the highly political process of interstate negotiations as they are of market forces. Tourism flows are also affected by such factors as the degree and character of sovereignty possessed by a state, the idiosyncrasies of diplomatic relations, and the economic policies pursued by states exporting and importing tourists. All of these shape the flow of tourists and tourism development funds across